Portugal braces for govt collapse over debt vote

23/03/2011 15:40
, On Tuesday March 22, 2011, 1:38 pm EDT

LISBON, Portugal (AP) -- Portugal's government is on the verge of collapse after opposition parties withdrew their support for another round of austerity policies aimed at averting a financial bailout.

The expected defeat of the minority government's latest spending plans in a parliamentary vote Wednesday will likely force its resignation and could stall national and European efforts to deal with the continent's protracted debt crisis.

The vote comes on the eve of a two-day European Union summit where policymakers are hoping to take new steps to restore investor faith in the fiscal soundness of the 17-nation eurozone, including Portugal.

Last year, both Greece and Ireland had to accept multibillion dollar rescue packages after markets lost faith in their governments' efforts to deal with their debt burdens.

By most measures, Portugal is one of the eurozone's smallest and feeblest economies but its financial collapse would likely trigger a fresh bout of nerves over other debt-heavy -- and bigger -- euro countries such as Spain, Belgium and Italy.

"Portugal seems very likely to become the third ... eurozone country to need a bailout," Emilie Gay, European economist at Capital Economics said.

The governing Socialist Party's parliamentary leader Francisco Assis made an 11th-hour appeal for opposition rivals to negotiate changes to the latest austerity package and ensure the government's survival. Prime Minister Jose Socrates, who heads the government, has said he will no longer be able to run the country if the package is rejected.

"This is a decisive moment," Assis said Tuesday.

Finance Minister Fernando Teixeira dos Santos has said failure to enact the package -- the fourth set of measures in 11 months -- would push Portugal closer to needing financial assistance.

But opposition parties say the center-left government's latest austerity plan goes too far because it hurts the weaker sections of society, especially pensioners who will pay more tax. The package also introduces further hikes in personal income and corporate tax, broadens previous welfare cuts and raises public transport fares.

The leader of the main opposition center-right Social Democratic Party, Pedro Passos Coelho, said late Monday that the political deadlock made an early election "inevitable."

Markets have heaped pressure on Portugal over the past year as investors demanded ever higher returns for lending it money, driving the country's borrowing costs to intolerable levels.

The yield on its 10-year bond, for example, was at 7.4 percent Tuesday -- not far from euro-era records. The interest rate has been above 7 percent for several weeks despite the government's earlier austerity measures which, its political rivals say, failed to quell investor fears.

Even so, the government has insisted it can weather the current difficulties and doesn't need a bailout.

The government's austerity measures have won praise from other European countries, but they are only half the story: Portugal urgently needs to generate fresh growth.

The economy is in deep trouble, with a double-dip recession expected this year and unemployment standing at a record 11.2 percent. Moody's recently downgraded the country's credit rating, and Standard & Poor's has warned it may follow suit.

As in Greece, the austerity policies have prompted numerous strikes, with train engineers set to walk off the job during the morning commute Wednesday.

Portugal's plight stems from a decade of miserly growth. While growing at the tepid rate of 1 percent a year, it ran up debt to finance its western European lifestyle.

Its economy is hobbled by old-fashioned practices, especially outdated labor laws which protect jobs, and has failed to keep pace with more flexible competitors.

Tullia Bucco, an analyst at Unicredit in Milan, says investors who have risked their money on Portugal can take some heart from the fact that the Social Democratic Party espouses debt reduction and increased economic competitiveness. The Social Democrats have been ahead in recent opinion polls.

Even so, the winner of any election is unlikely to get an extended honeymoon period.

"They could be very tough times ahead," Bucco said.

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